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Journal entry — FASB redeliberates targeted improvements to hedge accounting

Published on: Feb 16, 2017

At its February 15, 2017, meeting, the FASB redeliberated its 2016 proposed Accounting Standards Update (ASU), Targeted Improvements to Accounting for Hedging Activities, and made tentative decisions about whether (1) an entity should be able to return to performing qualitative assessments of hedge effectiveness after having performed a quantitative assessment, either because of a change in facts and circumstances or to otherwise validate continued use of qualitative assessments, and (2) private companies should have additional time to prepare their hedge documentation.

In the meeting, the Board tentatively concluded that:

  • An entity that (1) initially elected to qualitatively assess hedge effectiveness and (2) subsequently determined that it needed to perform a quantitative assessment should be allowed to return to performing qualitative assessments of hedge effectiveness if it concludes that it is appropriate to do so prospectively after considering the same principles and factors that it used to make its initial election at hedge inception.
  • Private companies other than financial institutions1 should be allowed to take additional time to prepare their hedge documentation. Under the tentative decision, a private company that prepares a “statement of intent to hedge” at hedge inception would not have to perform and document “all initial and subsequent hedge effectiveness assessments (on either a quantitative [or] qualitative basis . . .)” until its next set of financial statements (either interim or annual) is available to be issued. “The statement of intent to hedge would include the following information . . . :
    • 1. The hedging instrument
    • 2. The hedged item or transaction (including required documentation . . . for hedges of forecasted transactions)
    • 3. The nature of the risk being hedged.”

Editor’s Note: The relief that would be granted would be solely related to the timing, not the content, of a private company’s hedge documentation. Further, a private company would also be able to defer its preparation of the documentation of its method of assessing hedge effectiveness, to be consistent with its ability to defer the timing of the hedge effectiveness assessments.

Next Steps

The Board will address the following issues in future redeliberations:

  • The need for a market yield test for fair value hedges of interest rate risk (i.e., the “sub-benchmark” issue).
  • The recognition model for components excluded from an entity’s assessment of effectiveness.
  • Whether an entity should be able to exclude the cross-currency basis spread in a cross-currency swap from the assessment of hedge effectiveness.

Refer to the summary of tentative Board decisions for additional information.


1 The scope of this private company relief would be the same as the scope of the relief previously granted to private companies for certain hedging relationships under FASB Accounting Standards Update No. 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps — Simplified Hedge Accounting Approach — a consensus of the Private Company Council.


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